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Here's why Rotork plc could be a good long-term stock pick

17th May by Ben Hobson

When it comes to investing, I'm convinced it pays to buy and hold the best quality companies possible. These companies can compound investment returns at consistently above-average rates over the long term.

These stocks are different because they've got what billionaire investor Warren Buffett, calls economic moats.

In this article, I'm going to tell you what makes these stocks so special by using Rotork (LON:ROR) as an example. Rotork is a balanced, large cap in the Industrial Machinery & Equipment industry.

GET MORE DATA-DRIVEN INSIGHTS INTO LON:ROR »

Has Rotork (LON:ROR) got a moat?

When it comes to searching for companies with moats, some of the biggest clues actually lie in their financial statements. By looking at a small number of important ratios you can get an idea about the competitive strength and profit power in a business.

Here's what they are and why they are important - and how Rotork stacks up against them:

  1. High rates of Free Cash Flow - the measure of a thriving company.
    - A high ratio of free cash flow to sales can be a very positive sign. For Rotork, the figure is an impressive 14.9%.
  2. High Return on Capital Employed - the measure of a company growing efficiently and profitably.
    - A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Rotork, the figure is an eye-catching 20.6%.
  3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
    - Rotork has a 5-year average ROE of 19.2%.
  4. High Operating Margins (compared to peers) - the measure of a company with pricing power
    - Rotork has a 5-year average operating margin of 18.0%.

So it does seem as though Rotork might have some kind of economic moat. A quick look at Rotork's (LON:ROR) StockReport page shows that the company has a Quality Rank of 99.

Next steps

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. By analysing some key medium-term profitability and efficiency metrics, it's possible to start tracking them down. On this basis, it certainly appears that Rotork has some of the financial traits of an economic moat.

To find out more you might want to take a look at the LON:ROR StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.

To find more stocks like Rotork, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Moats of the FTSE 350 - which gives you everything you need. So why not come and take a look?

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